Popular and Free, SoundCloud Is Now Ready for Ads

By BEN SISARIO

August 21, 2014

SoundCloud is the ubiquitous wild child of the digital music world. Without paying artists or record companies, it lets people freely upload and stream any kind of audio, and musicians have embraced it as a way to share their hottest work with fans.

Lorde, the teenage pop star from New Zealand, rose to fame after posting her song “Royals” there.

Even in a market saturated with competitors like iTunes and Pandora, the six-year-old SoundCloud has managed to reach a huge scale with a catalog of unusual, often exclusive content. According to the company, about 175 million people listen to music on its platform each month — more than four times Spotify’s global audience.

“We have listeners in every single country in the world — and in space,” said Alex Ljung, SoundCloud’s chief executive, referring to recordings of the International Space Station posted by a Canadian astronaut.

Now SoundCloud has decided it is time to grow up. On Thursday, as part of a new licensing deal with entertainment companies, SoundCloud will begin incorporating advertising and for the first time let artists and record labels collect royalties. Eventually, it plans to introduce a paid subscription that will let listeners skip those ads, as they can with Spotify and other licensed services.

In many ways the move is a reaction to industry pressure to license content and produce revenue. It also reflects SoundCloud’s complex relationship with record labels, which use the service to promote new releases and even hunt for new talent but have been irritated by their inability to make money from SoundCloud’s millions of listeners.

As part of their licensing talks, major labels and some independents are negotiating with SoundCloud for equity stakes in the company; in exchange, the labels will agree not to sue SoundCloud over past copyright infringements, according to numerous people involved in the talks. Such deals could make SoundCloud an alluring acquisition candidate; earlier this year Twitter considered buying it, but ultimately decided against it.

One risk for SoundCloud as it goes more mainstream is losing some of its cool factor, as well as the good will it has built among artists.

In June, Kaskade, a star American D.J., set off a heated debate when he said that dozens of his SoundCloud tracks had been blocked because of copyright violation notices from labels. In an interview this week, he still seemed awed by SoundCloud, calling it “so beautiful, so elegant” in the way the platform works with social media. But he also criticized it over how it handled the copyright notices, which he and others say have increased sharply in recent months.

“They got this incredible service up and running off all these people that have been trusting it, and then they yanked the rug out from under them,” said Kaskade, whose real name is Ryan Raddon.

Founded in Berlin by Mr. Ljung, 32, and Eric Wahlforss, 34, two Swedish engineers steeped in the world of electronic music, SoundCloud quickly found a home in that city’s technologically savvy dance culture. “In true Berlin fashion, we pushed the launch button from the middle of a dance floor at a club at midnight,” Mr. Ljung recalled.

The company has raised more than $100 million in venture financing from blue-chip investors including Kleiner Perkins Caufield & Byers, Index Ventures and Union Square Ventures. Fred Wilson, a Union Square partner who has also invested in Twitter and Tumblr, said that he saw potential for SoundCloud as an alternative to the retail-like structure of other music services.

“I saw that this wasn’t about music in the iTunes sort of way,” Mr. Wilson said. “It was about music in the YouTube sort of way, where anybody could participate. It was a bottom-up approach.”

SoundCloud has evolved as a dynamic outlet for all kinds of music and audio, with content coming and going as users see fit. It is particularly dominant in the fast-moving genres of electronic dance music and hip-hop. Last week, for example, the rapper J. Cole used SoundCloud to release a tribute to Michael Brown, the 18-year-old killed by a police officer in Ferguson, Mo. Within hours the song was a viral hit.

The company says that 350 million people encounter SoundCloud’s audio files each month on the web and on mobile devices, and 175 million of them click play at least once. Despite that enormous audience, however, its revenues have been minuscule to date, as the company has made money only from the fees it charges some of its most active providers. According to public filings in Britain, where SoundCloud has an office, it had about $13 million in revenue and $20 million in net losses in 2012, the most recent year for which its accounts are available.

For its new program, Premier, SoundCloud will sign licensing agreements with music companies that will allow it to run advertising on its service. Most of the revenue from those ads will go to the content provider, said Jeff Toig, SoundCloud’s chief business officer, although he declined to be more specific.

The first advertisers include Red Bull, Jaguar and Comedy Central, whose ads will run only in conjunction with licensed content. Among the initial content partners are two major music publishers, Sony/ATV and BMG; the distributors INgrooves and Seed; the comedy site Funny or Die; and a number of independent artists, including the Washington rapper GoldLink.

“GoldLink and his fan base have been built from the ground up on SoundCloud,” said Matt Colwell, one of GoldLink’s managers. “Now, with it progressing to monetization, it’s the natural next step for us.”

Despite months of negotiations, the three major record companies — Universal, Sony and Warner — have not completed licensing deals. People briefed on those talks say that in some ways the vibrancy of SoundCloud’s platform is part of the problem: There are so many D.J. mixes, mash-ups and other hybrid works, shared and remixed so frequently, that appropriate licensing terms have not yet been fully worked out. After all, how do you split the money from a three-minute dubstep mash-up of Britney Spears, Eurythmics, Beethoven and a dozen others?

SoundCloud and the labels declined to comment on their negotiations.

With SoundCloud maturing, there is the question of whether its users, accustomed to ad-free music, will accept the new direction. According to Mr. Ljung, the artist-centered history of the company will help in that regard.

“People know that SoundCloud is very much a creator platform,” he said. “They understand that if they hear an ad, then a creator is getting paid for it as well.”

Correction: August 25, 2014

An article on Thursday about the digital music service SoundCloud misspelled the surname of the D.J. known as Kaskade, who criticized how it handles copyright violation notices from labels. He is Ryan Raddon, not Reddon.